Estimating Hysteresis Effects in Times of Crises

One of the most puzzling facts following the Global Financial Crisis (GFC) is that output in both advanced and emerging economies did not return to its pre‐crisis trend, contrary to the predictions of standard macroeconomic models. This paper analyzes the factors behind output hysteresis, with a special focus on the role played by financial crises. The paper shows that financial crises are associated with medium‐term output and total factor productivity (TFP) losses, suggesting that these crises lead to “scarring” effects on the supply side of the economy. The paper also examines how additional factors, such as persistently low investment rates, research and development (R&D), and the effects of currency and debt crises, contribute to these permanent losses. Our empirical findings are broadly consistent with models featuring endogenous productivity and capital‐embodied technological change, which suggest that a contraction in investment is a key factor that limits the adoption of new technologies, ultimately reducing medium‐term TFP and output.